The Real Reason Shell Halted Its Ukrainian Shale Operations

The Real Reason Shell Halted Its Ukrainian Shale Operations

Royal Dutch Shell has blamed air strikes by the government in Kiev against its own citizens in southern Ukraine as the reason it decided to declare a halt to its shale oil projects in the troubled region. In reality, the truth may be closer to the fact that company is disappointed with the economic viability of what it once thought was a large shale deposit and is looking for a way out.

After a series of dramatic statements and the signing of a $410-million letter of intent, a veil of uncertainty is being drawn around the myth of Ukrainian shale. Royal Dutch Shell CFO Simon Henry said in an interview with Bloomberg TV that the decision was prompted by the need to protect the company’s business interests in Ukraine.

By walking away, Shell will be able to “freeze” its involvement in the failed initiative while simultaneously minimizing the damage to its reputation. In accordance with the contract, Shell’s Ukrainian counterparts will, in the end, have to wait another 50 years to get their hands on that long-awaited “freedom gas.”

Shell will also be able to demonstrate its concern for its employees who work in the region where a brutal civil war is on the verge of breaking out. “Shell is in the East, and there’s a security risk there,” said Anders Aslund, a senior fellow at the Peterson Institute for International Economics.

According to a recent statement by the former head of Royal Dutch Shell, Peter Voser, “the company is now analyzing its business in shale,” which, translated from the streamlined language of press releases, means: The project is not earning its keep and we need to do something (Read: write off expenses).

prot

A little background: In January, 2013, Shell, along with Nadra Yuzivska, LLC and the Ukrainian government, signed a production-sharing agreement for the exploration, development, and extraction of hydrocarbons from the Yuzivska site (8,000 sq. km), a geological formation located in the Kharkiv and Donetsk regions.

By the middle of that same year, the company had lost $2.4 billion on shale gas deposits in the U.S. and was forced to document a very large drop in profits — 60 percent over the same period in 2012.

Shell’s first disappointment in the Ukrainian gas market turned out to be related to the quality of the metal in the pipes that Ukrainian post-Soviet industry was capable of providing. At the time, company spokesmen claimed, “We have repeatedly stated that we are prepared to use Ukrainian goods, provided that the price and quality can meet that of foreign equipment.

But at this stage, those pipes do not yet exist in Ukraine. Shell lobbied Ukraine’s Interdepartmental Commission on International Trade to have seamless steel casing pipes and production tubings with an outside diameter of up to 406.4 mm. brought in from Japan. Of course it was impossible to avoid having all this reflected in the final price of the project.

In March of 2014, it became clear that the Belyaevskaya-400 well Shell had drilled in the Pervomaysk district of the Kharkiv region in search of shale gas was not going to return a profit. Not only were there no pipes, there was no gas. “Gas was not found in our district. Exploration work proved that it wasn’t there,” the head of the Pervomaisk district state administration of the Kharkiv region, Viktor Namchuk, admitted on Feb. 28, 2014.

As in many other Eastern European countries, optimistic predictions about the amount of recoverable shale gas turned out to be several times higher than the realistic assessment of the reserves.

Likewise, Ukraine’s neighbors – Lithuania, Bulgaria, and Poland – have also seen shale projects shut down because they turned out to be less than economically viable. By the spring of 2014, Total, Chevron and Eni had also abandoned many shale projects in Eastern Europe for various reasons.

The current heated situation in Ukraine means that politicians in the EU and U.S. cannot announce the suspension of exports from the “shale revolution” in the region, but the business community has already begun to head for the exits.

Originally published by OilPrice.com

See also:

What Happened to Eastern Europe’s Dreams of a Shale Revolution?

CNPC Deal Becomes Russia’s Gateway to Asian Gas Market

CNPC Deal Becomes Russia’s Gateway to Asian Gas Market

The recent deal between China National Petroleum Corporation (CNPC) and Russian energy company Gazprom has the potential to counterbalance U.S. energy sanctions and broaden Russia’s energy options in Eurasia. The parties have contracted to build the new “Power of Siberia” pipeline over the course of the next five years. The goal is to supply China with 82 billion cubic meters of gas, or an average of 16.4 billion cubic meters per year. In addition, the Russian minister of energy, Alexander Novak, has said the Chinese side expressed a desire to advance up to $25 billion and to abolish import duties on Russian gas.

According to Vedomosti, the Russian version of The Wall Street Journal, the contract between Gazprom and CNPC is worth a total of $400 billion and covers 1.032 trillion cubic meters of gas. The price of the contract is based on the minimum volume and includes a “take or pay” provision. The contract is fully in keeping with Gazprom’s corporate strategy to diversify its fuel shipments. Essentially, it is no different from similar agreements made with Western European consumers and the price is competitive (above $350 per thousand cm., according to various sources). The Chinese state has tasked CNPC to build pipelines and storage facilities in China under the deal.

By the end of 2014, an additional intergovernmental agreement on energy cooperation may be signed at the state level. Speaking on the feasibility of the project, Alexey Ulyukaev, the Russian minister of economic development, claimed at the recent St. Petersburg International Economic Forum that “the project is certain to be 100 percent profitable.” Moscow is considering the introduction of preferential tax treatment to make the deal even more lucrative. A new tax relief scheme will be introduced on the fields that serve as the source for supplying gas to the Chinese market.

Image Source - RIA

Chelyabinsk Tube Rolling Plant  (Image Source – RIA)

 

On a broader scale, quick accomplishment of the deal may be a direct consequence of current U.S. policy in the Eastern Europe. After the Syrian fiasco, the Obama administration threw all its efforts into establishing a puppet regime of nationalists in Ukraine. The export of chaos in the heart of Europe was meant to disharmonize East-West energy dialogue. Following Washington’s scenario, the foreign ministers of France, Germany, and Poland forgot the ancient principle of pacta sunt servanda and violated the treaty with the then-legitimate president of Ukraine. This, de facto, sanctioned civil war and brutal violence in Novorossia.

The installation of a radical government in Kiev put at risk the whole system of energy supplies to Europe. By now it seems that no one in Europe can offer an intelligible explanation why it happened. Brussels has sacrificed decades of energy stability to the myth of U.S.-EU transatlantic solidarity (problem-plagued TTIP negotiations are a good benchmark here). Now the looming threat of Ukraine’s unsecured gas debt is one of Europe’s high-priority problems. Who has reaped the benefits of the dubious Western “victory” in Kiev? Just follow the money. While U.S. Vice President Joe Biden was testing the loyalty of America’s Eastern European satellites in Romania, his son, Hunter Biden, unabashedly joined the board of directors of Ukrainian natural gas company Burisma.

Reorientation of Russia’s energy policy to Asia will hardly bring about a dramatic change in the short term. Europe is and will remain an important trade partner for Russia’s natural gas exporters. Although the planned shipments of 38 billion cubic meters of gas to China are impressive, they amount to only about 20 percent of what is currently being provided to Europe.

However, in 2020-2025 perspective Russia-China gas deal will make the market for natural gas in China. The absolute numbers are not as important as the total economic impact of long-term cooperation. For example, the Chelyabinsk Tube Rolling Plant (ChelPipe) and CNPC subsidiary China Petroleum Pipeline Material and Equipment Corporation (CPPMEC) have signed a two-year agreement for joint participation in international pipeline projects.

The east Siberian fields will also supply a planned liquefied natural gas plant in Vladivostok, which could become a gateway to other energy-hungry Asian countries such as Japan, Korea and Taiwan. All things considered, Fitch rating agency believes that the CNPC-Gazprom deal represents a significant growth opportunity for the Russian gas sector. An alternative market in the East will be positive for Gazprom’s medium-to-long-term prospects, despite all attempts to impose economic sanctions on Russia.

Originally published by OilPrice.com

See also:

Russia-China Gas Deal Infographic (RT)

Sanctions against Russia and the Negative Effect on Global Energy Security

Sanctions against Russia and the Negative Effect on Global Energy Security

After a series of headline-grabbing statements about the possibility of “switching” European consumers over to American gas, the US media hastened to announce the launch of Obama’s oil and gas offensive against Russia. In reality the EU is not currently prepared, neither technically nor in terms of price, to buy its energy resources from the US.  It would take at least ten years to adapt even the technically advanced German energy system to work with American gas supply. In a crisis, when it is particularly urgent to see a quick return on an investment, such projects are unrealistic.

Whether German industry is ready to pay more for gas from overseas just for the dubious pleasure of “punishing” someone is a big question. Unlike EU officials, the German government is not publicly calling into question either its long-term contracts with Russia or the future of the South Stream pipeline. On March 13, 2014, the chairman of the board of Gazprom, Alexei Miller, attended a meeting with the Vice-Chancellor and Minister of Economics and Energy of Germany Sigmar Gabriel. “Germany is Russia’s number one partner in Europe’s gas and energy market,” Miller stated. “Russian gas accounts for 40% of all German imports. And we’re also noting an upwards tick in the quantity of gas supplies coming from Russia.  Last year, shipments totaled more than 40 billion cubic meters and we’ve seen a 20% annual increase.” Looking at these statistics, it’s clear that all the talk about Atlantic solidarity is having zero effect on the German government’s rational decision making. “We don’t need conflict escalation”, saidSigmar Gabriel during an expert roundtable on energy policy later in March. “Russia met its obligations under the gas contracts even in the darkest years of the Cold War”.

Sigmar Gabriel knows what he’s talking about. For Europe to be able to fully utilize gas supplies from the US, it will be necessary to build expensive facilities to decompress and store the gas. Moreover, in order to incorporate the “American” gas into the existing local energy systems, the European countries would need to construct new pumping stations. The associated infrastructure will further add to the price for the end consumer. Neither the bosses of the German industry nor the responsible political leaders will support such policy.

So who’s behind the demands that Russia be punished?

Barack Obama continues to look outside of Europe for ways to pressure Moscow. It is no coincidence that the US president’s recent statements on energy policy coincided with his visit to Saudi Arabia. President Obama came to Riyadh to bring down prices in exchange for the development of Saudi Arabian facilities to extract and liquefy gas for delivery to Europe. It’s unlikely that even Charles Maurice de Talleyrand himself could have persuaded the Saudis to dump as many resources as possible onto the market in exchange for the nebulous promise of American help to obtain new gas facilities at some unspecified date in the future.

PictureOil

Qatar’s position needs to be kept in mind too. There are serious personal disagreements between the Saudis and the hypersensitive former emir of Qatar as no one in the Middle East needs a new competitor in the gas industry. Obama’s attempt to repeat Ronald Reagan’s oil trick in the Middle East and “shake down” global prices will face many obstacles. A hike in oil prices below $80 would expose yet another issue that was a real controversy during Obama’s reelection campaign, namely – what to do about Iraq. Even a 10% drop in oil prices would finish off the Iraqi economy, still reeling from the US invasion. And Israel is closely monitoring the White House’s attempts to initiate a rapprochement with Iran. If Uncle Sam tries to levy energy sanctions against Russia using his political positions in the Middle East, he will quickly find he has loaded a gun only to shoot himself in the foot.

The US Secretary of Energy, Ernest Moniz, an Obama appointee and shale enthusiast, has jumped right into the discussion of “punishing” Russia. He promised to consider new efforts to ship LNG from the USA to Europe. In this particular case his verbal intervention is unlikely to reflect the position of the CEOs of the oil majors. They know very well that the industry’s real break-even points are nowhere near where they were 30 years ago due to inflation and higher operation costs. Today one facility—Cheniere’s $10 billion Sabine Pass terminal in Cameron Parish—has the required approvals from the Energy Department and U.S. Federal Energy Regulatory Commission.

In early March, the American economist Philip Verleger, who worked in the White House and the US Treasury in the 1970s, spoke as an expert on the issue of using energy as way to “punish” Russia. In the March 3, 2014 newsletter that he publishes for his clients, Verleger wrote that the US has a tool it can use to influence Russia – its Strategic Petroleum Reserve (SPR). US Reserve currently contains almost 700 million barrels of oil, five million of which were unloaded onto the market during the Washington visit of the interim Ukrainian Prime Minister Arseniy Yatsenyuk. “It almost defies logic to think there isn’t a link,” noted John Kingston, the director of Platts’ news division. Tapping the SPR to manipulate the global market would be a highly extraordinary decision. The only way to exert any real pressure on global oil prices would be to open up at least 50% of the entire SPR and grant export licenses to anyone who wanted one. The American DoE is obviously not ready for such draconian measures.

Looking at the 2014 report written by the DoE analysts who are known for their almost religious faith in alternative energy, the minimum price for oil in 2015 will be $89.75/barr. The Russian national budget in 2014, which was saddled with expenses related to the Olympics, was drawn up based on an average price of $93 per barrel. Ergo, even $80-90 would hardly spell disaster for Moscow, much less $100 a barrel. In addition, the “nonmarket” pressure by the US could be balanced by the exporter nations. For example, the idea of “energy currency” has long been a hot topic within OPEC and the Gas Exporting Countries Forum (GECF).

For the first time ever in the history of US-Russian relations we are seeing a public debate about a threat of economic sanctions that may have a long-range negative effect on global energy security. The Obama administration acts as if it is guided by a chapter out of an old Soviet textbook on political economy. At the moment, apparently, the sacred dogma of the free market, from Samuelson to Friedman, can be conveniently overlooked for the sake of punishing a sovereign nation. When the head of the most influential state in the world talks about manipulating market prices to punish recalcitrant players, what kind of “global free market” and fair play are we really talking about?

Originally published by OilPrice.com

Read more:

Hungary asserts its energy independence with South Stream

Sanctions against Russia will deal a blow to the American nuclear industry

Sanctions against Russia will deal a blow to the American nuclear industry

Nuclear energy is just one example of how America’s aggressive, expansionist policy abroad can cause real damage to key sectors of the US economy. The Democrat John Kerry, who is threatening Russia with unilateral economic sanctions, has apparently not deemed it important to anticipate the consequences of his statements even one step in advance.  Kerry’s and Obama’s global ambitions to promote “democratic values” are much more important to the White House than the jobs of ordinary Americans who are employed at nuclear power plants – but they rarely vote Democratic anyway.  

When discussing the recently popular topic of possible sanctions, observers traditionally focus on the fact that it is the relationship between Russia and the European Union that suffers the most from mutual constraints, because the economic ties between the United States and Russia have not been as strong. In this context, it’s worth remembering and mentioning an American industry that is critically reliant on one type of import from Russia – fuel for nuclear power plants.

This surprisingly significant dependency was established back in the early 90s after the launch of the HEU-LEU program, which entailed the processing of highly enriched uranium (HEU) from Russian nuclear warheads into low-enriched uranium (LEU) that was sold in the United States as fuel for nuclear power plants.

One should keep in mind that although there are plans to close some nuclear power plants (for reasons that include the low cost of natural gas in the US), nuclear energy in the United States still provides about 100 GW of power (for comparison, the entire Russian energy industry produces approximately 230 GW).

When discussing foreign imports of nuclear fuel for US atomic power plants, one must distinguish between two components, which are only partially interconnected.  First, there is the actual raw material for the fuel, which is based on natural uranium, and this also presents a problem for the Americans.  But the main issue is the capability to separate the isotopes, or in other words, to enrich the uranium.

They only produce 10% of what they need

In 2014, 48 million pounds of uranium will be needed to feed American nuclear power plants (calculated in terms of unenriched fuel in the form of U3O8 oxide).  This is the arbitrary unit we use, since the price quotes on the global market are also traditionally expressed in dollars per pound of uranium oxide.

Last year the HEU-LEU program came to a close.  In February, the EIA, the statistical office within the American Department of Energy, published data on the US production of uranium concentrate (calculated in terms of U3O8 uranium oxide) in 2013.  Over the course of two years, the output of this raw material for nuclear fuel increased by 21%.  The EIA points out that this increase partially offsets the shutdown of the HEU-LEU program.  But even with this in mind, the production of uranium oxide in the United States amounted to only 4.8 million pounds – exactly 10% of the required quantity of fuel.

Thus it is no surprise that in 2012, 83% of the uranium raw materials that were needed were purchased abroad, because the US could only meet 17% of its own requirements (this statistic probably includes the American program to convert HEU into LEU, thus the US market share comes to more than 10%).  The geographic distribution of uranium imports to the US is shown in the diagram below (a total of 58 million pounds, calculated in terms of U3O8):

111

Source: U.S.  Energy Information Administration, Uranium Marketing Annual Report

Nevertheless, it’s true that no particular problems with raw materials of uranium are currently visible on the world market, which is primarily due to the shutdown of reactors in Japan and some in Europe, plus one now in South Korea.  Despite the end of the HEU-LEU program, the quotes have not risen.  As a result, prices for uranium oxide remain stable, at a low level of $35 per pound.  Back in 2006-2007, the spot prices for this raw material climbed as high as $130 per pound.

They only enrich 20% of what they need

But acquiring uranium ore or uranium concentrate is only half the battle.  The bigger issue is converting it into fuel, and the main phase of that is the enrichment process.  And this is where the American dependence on Russian imports is most apparent.  As a reminder, a business’s capacity to enrich uranium is described using what are called SWUs (separative work units).  And enrichment is currently (or to be more precise – until recently) the responsibility of private businesses in the US.

Once the HEU-LEU program began, Russian fuel spent 15 years expanding its hold on the uranium-enrichment market, shutting out “home” facilities in the US.  The United States uses about 16 million SWUs each year, of which almost six million, or 35-40% of that total, has been provided by the Russian HEU-LEU program.  Approximately the same amount comes from other foreign enrichment facilities, primarily in Europe.  On its own, the US is able to produce only about three million SWUs per year, about 20% of what it needs.

The HEU-LEU program ended this year.  However, an agreement has been signed to extend the contracts.  Although strictly speaking this is not an extension of HEU-LEU, but rather the sale of commercial supplies of low-enriched uranium.  Under the new agreement (for 2013-2022), the contract assumes a gradual increase in deliveries, so that by 2015 those will make up about half the level of shipments that were seen under the “old” HEU-LEU program.

222

Source: U.S.  Energy Information Administration: Form EIA-858, Uranium Marketing Annual Survey

It remains an open question as to what extent Russian imports under the new contracts will replace the HEU-LEU program in 2014.  But America’s capacity is truly limited to the three million SWUs already in use, as can be seen in this table.  The old uranium-enrichment plant belonging to USEC, a subsidiary of an American corporation, is now closed.  A new one has not yet been built, and it is possible that the completion of its construction is being delayed because there is a good chance USEC will declare bankruptcy.  The remaining American capacity is generated in the US by Europe’s URENCO, which accounts for those three million SWUs in question, but by 2015 that number is expected to rise to six million SWUs.  For comparison, Russia produces 25 million SWUs.

The US can only make up for the missing enrichment capacity from Russia by increasing the amount it orders from abroad, and even that will only help in part.  Just as with uranium raw materials, the US is benefiting from the fact that so many nuclear power plants around the world are closed (thus the cost of one SWU has decreased in recent years to as little as $100).  But if Japan restarts its shuttered reactors this summer, the alternatives to Russian LEU will vanish altogether.  In any case, contracts have already been signed to continue with the Russian imports, and those deliveries have already begun – so if mutual sanctions go into effect, the American nuclear industry will experience significant hardship.

Originally published in Russian by ODNAKO Magazine (odnako.org) – Alexander Sobko

Russia chooses ‘soft’ approach to the Arctic

Russia chooses ‘soft’ approach to the Arctic

The extraction of minerals in the Arctic has become a hot topic after the Parliament of Norway opened up a new area on the fringe of the Arctic Ocean to offshore oil drilling last year. For more than a decade Norway has been exploring the Barents Sea region to boost performance and counteract falling oil production. Leading EU companies have flocked to the Norwegian Arctic, encouraged by discoveries by Statoil, ENI and Total, writes the industry website, Rigzone. Russia’s oil & gas majors have followed suit.

A year later it becomes more and more apparent that technically challenging initiatives such as Arctic oil & gas exploration are in need of better protection and a clear set of rules (as noted by Norway’s former foreign minister Espen Barth Eide as early as in 2012). Prirazlomnaya oil rig incident [1] has shown once again that protective action planning is a sad necessity for all interested parties. Russian air and space defense troops have already begun deploying units in the Arctic. The development of Soviet military infrastructure in the Arctic, installation of modern radar systems and reconstruction of Northern airfields are among top priority goals.

The good news is that today all mining operations on the continental shelf must rest on a solid contractual basis, so, more often than not, the widely discussed security risks may be overblown. A military presence in the High North should not be viewed as a sign of heightened tension. On the contrary, the growing interest in more security might be a great opportunity to further improve the cooperation among the Arctic nations. A limited military prescriptive may prevent illegal border crossing, organized crime and ecoterrorism. “Everything is done transparently, logically, and is not aimed against any neighbors, is not of a destabilizing character and does not cross any ‘red lines’”, concludes Russia’s Ambassador at Large and representative at the Arctic Council Anton Vasiliev.

Trifonova Lubov, Severomorsk - The Northern Sea Route

Trifonova Lubov, Severomorsk – The Northern Sea Route

 

Arctic search and rescue (SAR) operations and oil spill response also demand broader force projection. Not coincidentally the Arctic Council gave special priority to the Arctic Search and Rescue Agreement in 2013 and established the areas of SAR responsibility of each state party. SAR operations are impossible without direct involvement of the military and the EMERCOM. As a country that is de facto in full control of the Northern Sea Route and extended continental shelf, including the Lomonosov Ridge, Russia has prepared a set of measures to maintain safety on the open sea. Such deterrent force is a timely and reasonable precaution because fast climate change has intensified the Northern Sea Route (NSR) shipping. Jong-Deog Kim, a division director at the South Korean Maritime Institute, predicted that traffic between Europe and Asia along the NSR will grow by 6.5% a year and could potentially account for a quarter of all cargo traffic by 2030.

A plan to control oil pollution risks in Russia’s future area of responsibility is currently being developed in close cooperation with specialists from Norway. The Arctic Council oil pollution task force meeting in January, 2014 was one of the latest examples of productive work in this vital sphere. Both Statoil (Norway) and Rosneft (Russia) expressed interest in oil spill regulations. Another promising initiative was the creation of a new circumpolar business forum called the Arctic Economic Council (AEC) on the basis of The Task Force to Facilitate the Circumpolar Business Forum (TFCBF) in December, 2013.

Canadian journalists stress the fact that in the light of recent military buildup the problem of the overlapping Arctic claims of Russia and Canada may “send wrong message”. Deeper analysis of political environment in the High North shows that the issue of Arctic “land grab” is highly exaggerated. All UN procedures on the matter that include the necessary legal justification to support Russia’s Arctic claim will be completed by the end of 2014, so there is no territorial dispute. The claim is backed by the detailed mapping necessary to support the bid. Russian scientists completed several geological survey expeditions and have been gathering evidence to meet the UN Commission’s criteria since 2001.

Ottawa is trying to catch up with other littoral states and create some room for diplomatic maneuvering [2]. Canada lags behind other Arctic stakeholders, Norway and Russia, in Northern economic development, believes John Higginbotham, a senior fellow at Carleton University who focuses on Arctic research. Mostly due to domestic political situation, Canadian leaders have made a number of ambitious statements, for instance, issued a Canadian passport for Santa Claus and included the symbolic North Pole in Canada’s territorial claim.

Nevertheless, such statements are mostly intended for domestic audience and should not be interpreted as a sign of conflict potential. Canada and Russia enjoy very good relations on the Arctic, a view that was confirmed by Foreign Affairs Minister John Baird in a recent interview. Ottawa hosted the meeting of the Task Force on the Arctic and the North under the Canadian-Russian Intergovernmental Economic Commission resulted in signing of a bilateral cooperation plan.

Existing international law framework and forums like the Arctic Chiefs of Defense Staff Conference provide all the necessary mechanisms to treat and resolve all overlapping claims on the basis of negotiations. In any case, there is no need for screaming headlines about “the new cold war”. Recent examples of economic cooperation prove that business has become a gateway to regional political accord, debunking popular myths about the race for resources in the Arctic.

[1]The Prirazlomnaya oil rig is, in fact, a very complex industrial object. It’s the first Arctic-class ice resistant offshore gravity platform in the world. Attempts to exert “green” pressure on the Arctic nations might be a part of a broader strategy of ambitious non-Arctic players to sneak into the mineral-rich region.

[2] The Government of Canada has submitted a preliminary application to the UN in December, 2013.

Originally published by Barents Observer

Russia’s ESPO pipeline to balance EU oil supplies

Russia’s ESPO pipeline to balance EU oil supplies

In January, 2014 Russia completed its largest infrastructure project since the Soviet Union by expanding its eastern oil pipeline to the Pacific Ocean. The Asian markets are heavily dependent on imported oil and the role of Russian oil has been growing in recent years. Well-timed completion of East Siberia-Pacific Ocean (ESPO) pipeline is in good agreement with Russia’s strategy to diversify oil & gas supplies.

ESPO1

Thanks to tax breaks, Transneft oil company has opened its second and final branch of the $25 billion, 4,700km  pipeline. Transneft has also invested heavily in Siberian infrastructure:  5 new oil pumping stations, subsidiary lines of subwater passages through the Angara river, Ust-Ilimskoye water storage reservoir, the Lena river, the Aldan river, objects of outer power supply, new objects of technological communications.

map_vsto2_en

The ESPO blend (known as VSTO in Russian) was created specifically for the pipeline that bears its name. The blend is favored for its lighter qualities and lower quantities of salt chloride, writes OilPrice.com. The Eastern Siberian crude, a new oil blend, will also have serious impact on the world energy market. It is relatively light and contains less sulfur than, for example, the Dubai blend. “It’s a better quality crude than Dubai, Oman and some of the other competing crudes and that means that overtime the market should resolve that issue”, – said Jason Feer, Senior Vice president at Argus Media. This crude product has every chance of becoming a new benchmark and an important economic factor. The ESPO-2 blend is already traded with a $1 – $1.5 premium to Urals crude, Russia’s main export blend.

ESPO2

The project is being realized according to the Intergovernmental agreement of cooperation in the oil sphere between Russian Federation and People’s Republic of China, dated 21.04.2009. To China, Russian exports provide insurance against volatility on the unstable Arab oil market. Russia in its turn may use Chinese investments to create industrial cluster in Eastern Eurasia.

Read more:

Geopolitical and economic impacts of ESPO-2 pipeline

Russian ESPO Pipeline Threatens Europe Oil Supplies

Hungary asserts its energy independence with South Stream

Hungary asserts its energy independence with South Stream

During recent talks in Budapest, the prime minister of Hungary, Viktor Orbán, and Gazprom’s CEO, Alexey Miller, announced that the construction of South Stream in Hungary will begin in April 2015. “We would like to see a South Stream on the territory of Hungary,” Orbán said. “It’s far better to have it running through the country than bypassing it.” Work completed on a tight schedule is a hopeful sign that both parties are taking their commitment to the project seriously.

Budapest’s decision may be “a final blow” to the delayed Nabucco pipeline, wrote Bloomberg. The Hungarian state secretary for energy affairs, Pál Kovács, was laconic when speaking about Nabucco as a potential alternative: “First of all, the international company <Nabucco> didn’t do everything it could have to ensure the success of this project.  I must point out that apparently ten years was not enough time for them to put together a realistic and competitive concept; during that period they just wore everyone out and collected impressive fees and salaries, but after ten years we now have a clearer picture.”

At this point, South Stream is the only viable way for Hungary to solidify its position in the region as a transit power. South Stream Transport Hungary, a 50%-50% joint venture between Gazprom and the state-owned Hungarian Electricity Works (MVM), decided to finish construction in record time. The parties agreed to speed up the design and survey work, as well as the spatial planning and environmental impact assessment for the 229-kilometer-long Hungarian section of the South Stream. The first supplies of Russian natural gas are expected in Hungary as early as 2017. The National Development Ministry of Hungary claimed, “the country’s government will do everything in its power to remove any obstacles either to the realization of the South Stream gas pipeline or to the creation of a solution that is acceptable to all parties.”In other words, the investment environment in Hungary is ripe for development.

Energy cooperation will be definitely high on the agenda during Viktor Orbán’s present visit to Moscow.  The two nations are in negotiations to upgrade Hungary’s only nuclear power plant, for which Russia plans to provide a EUR 10 billion loan.  However, a significant focus will be on the South Stream project.  Development Minister Zsuzsa Németh smoothed the way for the talks. In November at a conference titled “South Stream: The Evolution of a Pipeline,” she declared that all Hungarian energy solutions are developed in accord with the European Union energy policy, in order to ensure strong, long-term partnerships. [1]

Image source - Gazprom.com

Image source – Gazprom.com

Russia enjoys the unique status of being an important strategic partner for Hungary in matters pertaining to energy. In order to speed up coordination and implementation, the Hungarian government has declared South Stream to be a project of special importance to the national economy. In 2008, the then-prime minister, Ferenc Gyurcsány, and Vladimir Putin signed an agreement regarding Hungary’s participation in the Russian pipeline project. And in the summer of 2010, Orbán and his party Fidesz suddenly threw their political weight behind the deal with Russia. The prime minister of Hungary may use harsh rhetoric in his domestic policy, but he seems to understand the importance of taking a multi-pronged approach and diversifying his gas supplies.

Such a deliberate policy is not uncommon in Eastern Europe. South Stream may lack full backing at the EU level, but the most important regional players, such as Austria, see it as a cornerstone of European energy security. For example, Deutsche Welle has noted that Gerhard Mangott, a professor of political science at Innsbruck University and an established policy advisor, views the current critical position of the EU towards South Stream as questionable. According to Prof. Mangott, the South Stream project in fact increases the EU’s energy security. “This isn’t a matter of additional gas and increased dependency on Russia, rather this is an alternative pipeline, which is more modern and robust in type.”

Until very recently the European Commission had no objections to Hungary’s plans for energy independence. In his 2011 speech on South Stream, the EU commissioner for energypromised that “we <the European Commission> will not impose any unreasonable or unjustified level of administrative or regulatory requirements <on South Stream> and will act as fair partners. ”But today the relations between Budapest and Brussels are badly strained. Hungary’s sovereign government has been portrayed in the EU media as the community’s enfant terrible. One can only hope that the European Commission will respect Hungary’s sovereign energy policy, because a competitive approach and a transparent business environment rank high on the EU’s list of free-market values.

In no small measure the EU itself needs Russia’s natural gas to diversify its supplies and obtain clean fuel for its recovering industrial sector. Under such conditions it is counterproductive to burden a project that is in the interest of both parties with unnecessary red tape.Even worse, the bureaucratization (or, rather, eurocratization?) of South Stream seems to correlate with the ups and downs of Brussels’s foreign-policy strategy in Kyiv. As a result, the European Commission changes its bargaining position towards the continent’s largest infrastructure project depending on external political impulses. Is it fair to assume that the “invisible hand” of the European market was offended by failure in Kyiv?

[1] In 2012 Hungary received 5.3 billion cubic meters of natural gas from Russia.

Originally published by Natural Gas Europe

ENI to pull out of shale projects in Poland

ENI to pull out of shale projects in Poland

Italy’s Eni will abandon all shale gas licences it currently owns in Poland due to difficult geology and a tough regulatory environment. The daily newspaper Puls Biznesu reported that the oil and gas major would let its three concession fade out, Natural Gas Europe writes.

“The (Eni) guys are packing their bags; they are leaving Poland. I think the reasons were predominantly costs, regulation and geology,” a person familiar with the matter told Reuters.

ExxonMobil was the first company to pull out of the country. Marathon Oil and Talisman Energyfollowed in 2013. Chevron and ConocoPhillips are the last two companies committed to a shale gas industry in Poland.

Read more:

1. Shale projects lagging in Eastern Europe

2. US shale myths and European market reality

3. Fracking FAQ

Follow

Get every new post delivered to your Inbox.

Join 234 other followers

%d bloggers like this: